...Notes on Mankiw, Romer, Weil Simon Gilchrist EC 502 1 Introduction: • To a first approximation, predictions of the Solow Growth Model are correct: – Savings and population growth affect GDP per capita in directions predicted by the Solow model. – 50% of variation in GDP per capita can be predicted by the Solow model. • While qualitative predictions are confirmed, quantitative effects of savings and population growth are too large to be consistent with standard Solow growth theory. 1 • An augmented version of the Solow growth model that allows for human capital accumulation can explain the data however. – Adding human capital explains why coefficients on savings and population growth are upward biased – human capital is an omitted variable which is positively correlated with savings. – When schooling is included in the regression as a measure of human capital, MRW find that ∗ Coefficient on savings and population growth are now of the correct magnitude for the augmented model. ∗ The augmented Solow model now explains 80% of the variation in cross-country living standards. 2 2 • Model: Population and technology grow at constant exogenous rates: L(t) = L(0) exp(nt) A(t) = A(0) exp(gt) Cobb-Douglas production Y (t) = K(t)α (A(t)L(t))1−α Constant savings rate: I(t) = S(t) = sY (t) Capital accumulation dk = sy(t) − (n + g + δ)k(t) dt where k(t) = K(t) A(t)L(t) Y (t) y(t) = = k(t)α A(t)L(t) • which implies that dk = s (k(t))α − (n + g + δ)k(t) dt 3 3 • ...
Words: 1159 - Pages: 5
...Population-Control-Policies and their Implications for Economic Growth in China Bachelor’s Thesis supervised by the Department of Economics at the University of Zurich Prof. Dr. Fabrizio Zilibotti to obtain the degree of Bachelor of Arts in Economics Author: Noemi Schramm Course of Studies: Economics Closing date: August 17, 2011 Abstract This bachelor thesis is giving an overview on previously performed research how family-planning-policies in China (explicitly the so-called One-Child-Policy) have affected economic growth since 1979 and tries to give possible predictions and forecasts on how it could affect economic growth until 2050 through critical model analysis. The Solow model gives theoretical answers but also yields analytical results through calculations subject to different population development scenarios (low, middle, high growth rates). The dependency ratio as a measurement of population age structure is analyzed and implemented into the Solow model to help understand the influence of family-planning-policies. It is shown that the One-Child-Policy affected heavily the last 32 years of China’s economic development and will continue to affect its future, but according to the calculations in this paper, the impact changes from a positive one to a negative one. Acknowledgements I would like to thank Professor Fabrizio Zilibotti for his supervision and for giving me the opportunity to write my thesis at his chair. Especially I would like to thank Yikai Wang for...
Words: 11172 - Pages: 45
...Explain and evaluate the neo-classical theory of long-run economic growth. In light of this theory what useful insights can be gained concerning the economic growth process of the UK economy over the past few decades? In recent year’s macroeconomists have become increasingly dissatisfied with Solow’s neoclassical theory of long run economic growth, through scrutiny of its application to the real world. (Gordon, 2006). In this essay these criticisms are going to be addressed first by explaining the theory, then considering the effect of changing different variables such as the savings rate, population growth and technical progress. The theory will then be applied to the UK economy over the past few decades discussing its relation to slow and rapid growth in certain periods. To conclude, criticisms will then be discussed to value the theory against reality. The neoclassical theory of long term economic growth is determined by marrying the production function and the savings investment line (Gordon, 2006). The production function studies the relationship between real GDP (Y) and the ‘autonomous’ growth factor (A) along with capital (K) and labour (N). This is shown by the equation Y=AF (K, N) (Gordon, 2006). The function tells us that sources causing an increased standard of living derive from the autonomous factor and the capital intensity. The per person production function shows how much output can be produced by a given quantity of factor input and is illustrated...
Words: 3044 - Pages: 13
...theories of development? 2.Is there a fixed set of prerequisites for development? Explain. Chapter 2 3.Comment on the following statement: The level and growth rate of real GDP per capita can be a misleading indicator of development. At the same time, countries that experience sustained increases in real GDP per capita over time will tend to be more developed. 4.Why is an understanding of what “development” means crucial to policy formulation in developing nations? Why do you think a country may have difficulties in agreeing on a rough definition of development? 5.Why do we use “purchasing power parity” measures when comparing incomes across countries? 6.Suppose that you had to explain this graph to someone who is not a “visual learner” – he just doesn’t get pictures. You have to explain every feature of the graph using words. 7.What are the components of the Human Development Index? What are some strengths and weaknesses of the HDI as a comparative measure of human welfare? 8.Discuss the Millennium Development Goals. How can the mere act of adopting these goals as aims of action be beneficial for economic development? Chapter 3 9.What does it mean to say that “factor accumulation” and “productivity growth” are important for development? How are they distinct? 10.Most growth models assume that new investment increases the capital stock, that investment is financed by saving, and that saving comes...
Words: 1841 - Pages: 8
...Södertörns högskola | Department of economics Magisteruppsats 30 hp | Vårterminen 2013 The Effect of External Debt On Economic growth – A panel data analysis on the relationship between external debt and economic growth. Av: Dereje Abera Ejigayehu Handledare: Joakim persson Handledare: [Handledarens namn (teckenstorlek: 12p)] Abstract The impact of external debt on economic growth is a debatable issue between scholars since the onset of the debt crisis in 1980’s. This thesis examines whether external debt affects the economic growth of selected heavily indebted poor African countries through the debt overhang and debt crowding out effect. This is carried out by using data for eight heavily indebted poor African countries between 1991 to 2010.The result from estimation shows that external debt affects economic growth by the debt crowding out effect rather than debt overhang. Moreover, in an attempt to mark out debt servicing history, the thesis found the selected countries are not paying (servicing) more than 95% of their accumulated debt. Key Words: External Debt, Debt overhang, Debt crowding out, debt servicing and Table of Contents CHAPTER ONE .....................................................................................................................................1 INTRODUCTION ..................................................................................................................................1 1.1 Background of the study.............
Words: 12805 - Pages: 52
...October 26 08 Fall The Determinants of Economic Growth ------------------------------------------------- Executive summary ------------------------------------------------- Introduction Barro (1991) and Fernandez, Ley, and Steel (2001) use various regression techniques to determine the key determinants of growth, and in particular, the driving forces behind cross-country variations. Neoclassical growth theory proposes that cross-country and per capita income will converge due to diminishing returns to capital and the diffusion of technology. There are samples of countries that display this ‘absolute convergence, however, such a phenomenon is not universal. These seemingly inexplicable variations in growth present an important question of what are the determinants and is there a role for stabilizing policy. Explain why the study is important. Why is economic growth so important? Coexistence of Growth miracles, Growth Disasters Barro (1991) provides that it is ultimately the relationship between the level of human capital and initial GDP that allows some poor countries to converge on rich countries. Ultimately, our conclusion parallels that of Barro’s and we find that the driving determinants of growth are Human capital, Investment and the initial GDP level. Our analysis follows the key ideas and assumptions of Barro’s model. We use both Primary and High School enrolment as a proxy for the accumulation of Human capital, however, this does pose some restrictions...
Words: 4117 - Pages: 17
...Economic Growth 3.1 Introduction • In this chapter, we learn: – Some facts related to economic growth that later chapters will seek to explain. – Some tools used to study economic growth, including how to calculate growth rates. 3.2 Growth over the Very Long Run • Sustained increases in standards of living are a recent phenomenon. • As a result per capita GDP differs remarkably across countries. • The Great Divergence: the period from 1700 to today • Before 1700 – Per capita GDP across countries differed only by a factor of two or three. • Today – Fanning out of per capita GDP – Cross-country it differs by a factor of 50! • From 1870 to 2012, US per capita real GDP rose by a factor of 17. 3.3 Modern Economic Growth The Definition of Economic Growth • We define the rate of economic growth between two periods as the percent change in per capita GDP (in real terms) between those periods. • Percentage change in GDP between period t and and t + 1 “new” GPD “old” GPD • Say per capita real GDP was $20,000 in year 1990. We know it increased by 10% (10/100 = 0.1) between 1990 and 2000. What is the 2000 value? • Applying the growth rate to find next period’s value: growth rate • Suppose y grows 2% each year. – NB: That is an accumulated 49% over 20 years. • The constant growth rule: time period variable value in period t initial variable value in period 0 constant growth rate ...
Words: 694 - Pages: 3
...Classical Model builds on the principles developed in microeconomics to explain how equilibrium production and employment might be determined from profit maximizing and utility maximizing behavior. From the system of dynamic model of the economy we can see that, as the production increased, the income will increase. And then both saving and consumption will increase. From this point, there are two ways to go. More consumption will decrease the production. But more saving will cause more investment and raise the technology, more investment will increase the capital, the increasing of capital will increase the production, in this way our economy will growth. In a short way, after the increasing of income, if people put the majority of their income in the bank, instead of spend all of their money just for having fun, our economy will grow. 2. In the year 1931, some government and private experts were together to discussing our economy, but by that time they can’t give out enough data and reliable statistics. In 1934, they send out Simon Kuznets to figure out how to calculate the national accounts in a set of uniform. And that is how he came up with GDP. As the inventor of the GDP, Simon Kuznets had this to say in his very first report to the U.S. Congress in 1934, he said: “the welfare of a nation scarcely be inferred from a measure of national income.” In 1962, Kuznets stated: “Distinctions must be kept in mind between quantity and quality of growth, between costs...
Words: 1605 - Pages: 7
...SCIENCES DEPARTMENT OF ECONOMICS DISCUSS THE VARIOUS ECONOMIC GROWTH THEORIES AND DEVELOPMENT THEORIES HOW CAN SUCH THEORIES BE USED IN ECONOMIC DEVELOPMENT IN NIGERIA. COURSE TITLE THEORY OF ECONOMIC DEVELOPMENT COURSE CODE;ECO 2911 INTRODUCTION According to Dennis Goulet in The Cruel Choice, “it matters little how much information we possess about development if we have not grasped its inner meaning”. Development is not purely an economic phenomenon. In an ultimate sense, it must encompass more than the material and financial sides of people’s lives, to expand human freedom. Every nation strives after development. Development and growth should therefore be perceived as a multidimensional process involving the reorganization and reorientation of the entire economic and social systems. The sources of economic progress can be traced to a variety of factors, but by and large, investments that improve the quality of existing physical and human resources, increase the quantity of these same productive resources, and raise the productivity of all or specific resources through invention , innovation and technological progress have been and will continue to be primary factors in stimulating economic growth in any society. ECONOMIC DEVELOPMENT THEORIES Definition of economic development It can be defined as the increase in the standard of living of a nation's population with sustained growth from a simple, low-income economy to a modern, high-income economy...
Words: 6595 - Pages: 27
...Economics of Growth LEARNING OBJECTIVES After reading and studying this chapter, you should be able to: ̈ Understand that economic growth is due to growth in inputs, such as capital and labour, and to improvements in technology. ̈ Understand that capital accumulates through savings and investment. ̈ Understand that the long run level of output per person depends positively on the savings rate and negatively on the rate of population growth. ̈ Understand that the basic economic growth model predicts that standards of living in different countries will eventually converge. 61 62 PART 2 The Economy in the Long Run and the Very Long Run e have enormously higher incomes than did our great-grandparents. People in industrialized nations are far wealthier than people living in less developed countries. In fact, North Americans and many Europeans had higher incomes a century ago than people in poor countries do today. What accounts for these vast differences? What will determine our standard of living in the future? Growth accounting and growth theory answer these questions. Growth accounting explains what part of growth in total output is due to growth in different factors of production (capital, labour, etc.). Growth theory helps us understand how economic decisions control the accumulation of factors of production, for example, how the rate of saving today affects the stock of capital in the future. Figure 4-1 shows GDP for four countries...
Words: 11083 - Pages: 45
...indicators of macroeconomic performance: 1. Rising living standards – economic growth | * Tendency for level of output (quality and quantity) to increase over time * Growth in the material wellbeing of the population * Is the responsibility of governments and international organizations | 2. Stable Business Cycle | * Low volatility in fluctuations of actual output around its trend or potential output Avoiding extremes of short-run macroeconomic performance * An economy that is growing excessively may be prone to inflation | 3. Relatively stable price level | * Maintaining the real value of the currency * Low (positive) rate of inflation | 4. Sustainable levels of public and national debt | * Public debt: during a budget deficit, the government must borrow from the private sector to meet its spending * Foreign debt: borrowing by domestic residents from foreign countries, influenced by economy’s current account deficits | 5. Balancing current and future consumption | * The relationship between investments and saving in an economy | 6. Full Employment | * Providing employment for all individuals seeking work * Does not mean zero unemployment | Measuring national or aggregate output/Production: Gross Domestic Product (GDP) * The market value of final G&S (G&S at its last stage of production and ready...
Words: 5901 - Pages: 24
...the cause of a high level of income? Explain. Life expectancy is positively correlated with the income level. This does not imply that better health conditions are the cause of a higher level of income, because correlation does not imply causality. For example, the positively correlation between life expectancy and the income level may because a) better health conditions lead to higher income, or b) higher income lead to better health conditions, or c) something else cause both better health conditions and higher income. 2) According to basic growth models, do better health conditions contribute to higher income levels? Explain. Yes. Better health conditions means higher accumulation of human capital in an economy. According to the endogenous growth models, human capital is one type of capital. In basic growth models, capital accumulation is one of the driving forces of economic growth. As a result, according to basic growth models, better health conditions would lead to higher income levels. 3) Will health conditions be affected by income levels? Contribute a story and explain. (There is no single answer to this question.) Yes. For example, malnutrition is popular in some developing countries. The poor do not eat well because they lack money. This...
Words: 1794 - Pages: 8
...economia.unisa.it/ Economic Growth and Development ECON 405 September 27th, 2011 – January 3rd, 2012 TABLE OF CONTENTS Introduction...................................................................... 1 Brief analysis of the evolution ......................................... 2 Main sensitive data .......................................................... 4 Conclusion ..................................................................... 15 References……………………………………………………………………… Appendix............................................................................ LIST OF TABLE TABLE 1 – TRENDS OF POPULATION, GDP IN CURRENT USD AND GDP PER CAPITA DATA (2001-2010)………………….. 4 LIST OF FIGURE FIGURE 1 – FIGURE 2 – FIGURE 3 – PERSONAL COMPARISON AMONG REAL GDP PER CAPITA AND POPULATION (% ANNUAL GROWTH). ..........7 FOCUSING ON THE POPULATION GROWTH IN ANNUAL PERCENTAGE.....................................................8 PERSONAL ELABORATION OF THE NUMBER OF PATENTS APPLIED IN ITALY BY RESIDENT AND NONRESIDENT ......................................................................10 FIGURE 4 – PERSONAL COMPARISON OF THE PATENTS AND APPPLICATIONS’ LEVEL AMONG THE WORLD EUROPE AREA, FOCUSING ON A FEW COUNTRIES ...........11 FIGURE 5 – A PERSONAL ANALYSIS OF THE CONSUMPTION AND SHARE, GOVERNMENT SHARE OF CONSUMPTION INVESTMENT PPP, RELATED TO THE TOTAL GDP PER CAPITA. ..............................
Words: 9913 - Pages: 40
...Journal of Economic Perspectives- Volume Number1- Winter1994-pages 23-44 8, Endogenous Innovation in the Theory of Growth Gene M. Grossman and Elhanan Helpman C an economic growth be sustained in the long run? If so, what deter- mines the long-run rate of growth? Which economies will grow the fastest? And what kinds of policies can governments use to accelerate advances in living standards? These questions were central for those who studied growth in the 1950s and 1960s, and remain so in the recent revival of interest in long-run economic performance. Two observations have motivated many of the recent contributors to growth theory. First, output expansion has outpaced population growth in the 200 years since the industrial revolution. Second, different countries have remained on seemingly disparate growth paths for relatively long periods of time. Related to this second observation is another: in cross-section and timeseries data, we find national and regional growth rates correlated with a variety of economic, social, and political variables, including many that are affected by government policies. These observations have led the current generation of growth theorists to formulate models in which per capita income grows indefinitely and long-run performance reflects structural and policy parameters of the local and global economy. With this apparent similarity of intentions, recent research efforts have headed in several different directions. One strand of theory...
Words: 10469 - Pages: 42
...context of increasing returns, create the possibility of multiple equilibria. A poor country can be caught in a low-equilibrium “poverty trap”, government intervention can potentially solve the coordination problem, and “push” the economic into the better equilibrium allowing a “take-off” into sustained growth. The Big Push idea has returned to the center of development policy in the recent past. William Easterly (2006) described 2005 as the Year of the Big Push. It has done so in particular in the context of debates over Africa: the compelling normative case to transform development possibilities of Africans, has been associated with renewed emphasis on the positive case for a Big Push. This has been linked to the case for a major expansion in aid, notably in the work of the Commission for Africa and the Millennium Development Goals; Jeffrey Sachs has been a vigorous exponent of this linkage. This case concerns the analytics of the Big Push, the evidence and its applicability to a poor African country. It bridges issues of growth (from macro) and general equilibrium (from micro). There are three parts. The first outlines the analytics: it uses the prism of the Solow growth model to look at three possible cases for multiple equilibria, and focuses on the coordination problem as one account. The second looks at approaches to evidence from cross-country patterns, and from country experiences. The third poses the question of Big Push...
Words: 5608 - Pages: 23
